Out of the Box Facilities Financing Ideas for Charter Schools

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1 Out of the Box Facilities Financing Ideas for Charter Schools Table of Contents The Challenge Lever 1: Getting ready to tackle the facilities challenge Real estate planning Business planning Accountability planning Lever 2: Minimizing the amount you have to finance Redefining the school Bringing your own equity Working a deal Lever 3: Minimizing the cost of financing Being a smart consumer Seeking out low-rate options Abating risk Looking for revenue-generating opportunities Lever 4: Advocating for policy changes Meeting the Challenge Appendix: Where to go for more information Schools featured in this document Potential public sources of facilities financing Public sources of facility sites and buildings Other resources Some sources of financing and financial services for charter schools

2 Out of the Box Facilities Financing Ideas for Charter Schools The Challenge If you are connected with a charter school, no one needs to tell you that finding and financing a facility is one of the most daunting challenges faced by charter schools everywhere. No one needs to point out that appropriate buildings are scarce; that affordable leases and loans are hard to come by; that renovations can drain even the most expansive start-up budgets; that managing a real estate development project is a complex and risk-filled task; that making those monthly mortgage or rent payments can eat into your precious operating dollars. Like North Carolina s New Century Charter School (see From Moviehouse to Schoolhouse: Persistence Pays Off box), you may have set up school in a series of temporary sites before finding your permanent location permanent, that is, until your lease ran out or your growing enrollment had you bursting at the seams. Like the leaders of many of the other schools featured in this report, you may have gone begging at what seemed like dozens of financing sources before you put together a deal that worked, if only marginally. But like these other school leaders, you may also have devised some of the most creative facility financing arrangements public education has ever seen building your school but at the same time building models from which we all can learn. The Charter Friends National Network s Out of the Box is about the challenges facing charter schools as they seek to finance their facilities. But more to the point, it is about the extraordinary strategies charter school leaders have put in play in order to make homes for their schools. Based on exchanges with dozens of people around the country that have devised these strategies, this document describes a set of levers or tools that charter leaders have at their disposal when it comes to financing a facility. Out of the Box is not a comprehensive guidebook to facilities financing, but it should provide you with a host of ideas to pursue in your own settings and a wealth of resources to mine for more information. Though it focuses on one aspect of the facilities challenge financing it touches on many of the other issues you face, including finding an appropriate site, managing a construction or renovation process, and operating a facility safely and economically once the building opens. The document is organized around four major levers charter schools are using to meet the facilities financing challenge: Lever 1: Getting ready to tackle the facilities challenge. Schools are finding that well-crafted business plans, clear accountability plans, and detailed facility-development plans make all the difference. This section of Out of the Box provides information about tools that can help with these processes. 2

3 Lever 2: Minimizing the amount you have to finance. Most charter schools end up borrowing some money for their facilities or incorporating the costs of renovation in a long-term lease. But schools across the country are finding creative ways to bring down the amount they finance. Lever 3: Minimizing the cost of financing. By shopping aggressively, exploring low-cost forms of financing, looking for ways to make their deals less risky, and pursuing other strategies, schools everywhere have reduced the interest rates they end up paying on the amounts they have to finance. Lever 4: Advocating for policy changes. Many of charter schools facilities problems grow out of unfavorable public policies toward charter schools. In many states, charter schools have joined forces to win improvements in these policies, obtaining per-pupil revenue for charter school facilities and other helpful changes. Throughout the document, the ideas presented are based on the experiences of real charter schools. Profiles of schools strategies and other important tools are set apart by boxes and icons, explained in the box. If you have identified other successful strategies in your work, please submit them to the Friends Network. Like the labors of charter leaders in solving facilities problems, Out of the Box is a work in progress, and we welcome your ideas. See the inside front cover for information about contacting the Friends Network. Look for These Icons Throughout the Document School profile. These boxes provide real-world examples of how charter schools have approached the facilities financing challenge. Tools you can use. These boxes provide tools and resources you can use to address your own facilities financing needs. 3

4 From Moviehouse to Schoolhouse: Persistence Pays Off New Century Charter School in Carrboro, NC offers a bizarre yet apparently not that uncommon example of how charter schools across the country are struggling to find suitable facilities. When New Century opened in September of 1998, its doors were not those of a school, or for that matter anything resembling a school. Rather, it opened its doors in a local movie theater. Of course, New Century s experience with finding a good location did not start or end there. Early on, New Century came across a local real estate developer who, having attended an alternative high school himself, became sympathetic to the school s needs. He began developing plans for the school on a plot of land he owned in Carrboro. Unfortunately, that plan fell through because of strong neighborhood opposition to having a high school in the immediate area. Undaunted, school leaders shifted their attention to trying to obtain an existing building in Carrboro, but that plan fizzled as well. Although New Century s leaders had started their school search early on, it was now the summer of 1998 and the school was scheduled to open in September. Running out of time, the school s staff worked out an arrangement with the owner of the theater, who just happened to be a former English teacher, and were able to secure a temporary site until the end of the year. Fortunate and grateful to have a home, the staff embraced the challenge of holding classes in such an untraditional location by using the projection screen for overheads and designing lap boards for the students to work on while in their seats. Unfortunately, despite their efforts, using the theater proved to be too complex. The school had to set up and tear down every day, a strenuous routine. While operating in the theater, the school s leaders came close to finding a permanent site several times. In November, they had tentatively negotiated an agreement for a site at a local church camp. The school would use it during the school year and the church group who owned it would use it for summer camp. Everything seemed to be falling into place, until once again public perception foiled the deal. During this time, some bad publicity came out in local papers about the problems facing other charter schools. As a result, this deal, as well as another one with a church, fell through. It was now December and the end of the arrangement with the movie theater. New Century now faced the same dilemma it had in the summer where would it hold classes? During Winter break the school moved out of the theater and into a nightclub at a local motel. While this location would only be home to New Century for four weeks, it proved to be a good, and necessary, opportunity while the school continued to search for more permanent quarters. Finally things started looking up. Space opened up in a building that had originally been the area schoolhouse before being abandoned and falling into disrepair. Eventually the building was purchased and renovated into artists studios and community building. After cycling through five potential sites in less than 2 years, New Century finally moved into the old 1930s school building as its permanent home in February of **For more information contact Holly Snyder at (919) or 4

5 Lever 1: Getting Ready to Tackle the Facilities Financing Challenge The first lever you have at your disposal is to get your own house in order as a charter school. Financing a facility inevitably involves presenting your case effectively to prospective lenders, investors, property owners, and grant-makers. For simplicity, this document will refer to all of these potential audiences as investors, since charter schools ask all of these groups to take risks in the anticipation of some return, whether financial or otherwise. Investors are likely to be concerned about three sets of issues. First, will your school be able to develop and manage a facility that is (a) appropriate to the school s educational program and (b) valuable on the market in the event the school does not succeed? Second, will the net revenue your school generates be sufficient to make loan or lease payments? Third, when your school s charter comes up for renewal, how good are the chances that you will get the go ahead to operate beyond your initial term? A Word About Terms: Investors Out of the Box uses the term investor to refer to a range of entities that provide financing for charter school facilities, including: lenders holders of bonds providers of equity property owners making long-term leases donors public agencies that may provide financing for charter schools All of these are investors in the sense that they provide financing up-front in anticipation of some uncertain future return, whether financial or otherwise. This document uses the single term for simplicity. Successful charter leaders devise answers to these three questions through three kinds of planning: real estate planning, business planning, and accountability planning. Real Estate Planning As you well know, developing a charter school facility is a complex undertaking. Whether you end up renovating an existing space for your purposes (as most charter schools do) or constructing a new building, the process is likely to be time-consuming, expensive, and filled with twists and turns and false starts. Even if you don t need any financing, careful planning of this process is essential to your school s success. And if you, like most schools, do need financing for your facility, having a clear real estate plan and demonstrating the capacity to carry it out are central selling points for investors. 5

6 If there is one overarching piece of advice almost all experienced charter school facility developers offer, it is this: give yourself time to find, finance, and develop your facility. Time is critical first and most simply because the real estate development process takes time, far longer than most people expect. And giving yourself time helps you negotiate effectively with all of the providers you ll encounter, be they lenders, property owners, or construction companies. If you have the time and inclination to shop, you re in a better position to bargain. Of course, time is not a luxury all can afford. But early starts and foresight can help; avoid waiting until the last minute if at all possible. Beyond allowing yourself time, charter operators provide a range of tips on conducting your facility planning process. Some of these are offered in the Keys to Effective Real Estate Planning box, which draws largely on the advice of the California Charter Schools Development Center. Business Planning The core document reviewed by potential investors is the school s business plan. The business plan presents your case for financing. A typical charter school business plan includes elements such as: a description of the school s mission and educational approach an analysis of the school s market, explaining the target population s needs and the school s competition an explanation of the school s marketing strategy an outline of the school s management and governance plans, including descriptions of key board members and personnel financial data about the school, including annual budgets and cash flow statements projected into the future and, in the case of existing schools and organizations, financial statements from prior periods. Fortunately, there is no need to start from scratch when developing a business plan to show potential investors. A wide range of business plan outlines, sample business plans, sample financial statements, and downloadable business planning spreadsheets are available. See the Tools for Business Planning box for a host of resources for charter schools specifically and for small enterprises more generally. 6

7 Keys to Effective Real Estate Planning Understand local, state and federal processes. Many different agencies have their hands on the real estate development process. Local officials oversee zoning procedures that may affect your project. Another local factor is building codes, which specify in great detail the constraints you will face. Your state charter law or regulations may contain specific provisions regarding facilities. More general state education law may contain strictures on school facilities that go above and beyond local building codes. And federal laws, such as the Americans with Disabilities Act, include requirements that affect charter facilities. Identify needs. Knowing what you need is a vital early step. Your facility should be an integral part of your overall school design, including its instructional program and overall business plan. Consider not only the total space you need for your core academic program, but also questions about the configuration of this core space, technological needs, auxiliary facilities (like playgrounds and athletic space, common / multipurpose spaces, parking, kitchens, offices), location and traffic flow. As discussed below, think creatively about which of your needs truly must be met on your main campus and which can be met through partnerships with others, but make sure you think through how you will meet all your needs. For an example of how one school listed out its needs for space, see the box One School s Space Needs. Identify options. Think broadly about possibilities, including existing district school space, existing private school space, churches, retail or industrial space, modular buildings, and new construction. Integrate into school plan. Consider not just short-term needs, but also long-term plans for expansion of enrollment and programs. Consider what your unique instructional program requires in the way of facilities. Consider all the financial trade-offs involved with different facility choices (see the Business Planning section, below). And don t forget the significant amount of leadership attention that s required to make a facility happen for a school be sure the timing of this attention makes sense in light of your broader leadership tasks. Implement with care and expertise. Experience with finance, design, and construction is essential make sure you have that expertise internally or have access to it via well-crafted contracts. Negotiate contracts with great care, though caveat emptor! Identify and address significant risks early, and have back-up plans for inevitable foulups and delays. Bring key advisors and potential partners in early for preliminary discussions and feedback. Adapted from materials of the California Charter Schools Development Center. For more information on CSDC, visit 7

8 One School s Space Needs: St. Paul Community Learning Center Type of Space Size Needed for School Serving 150 K-6 Students (in square feet) Reception area and office: 300 Work room: 300 Parent resource room: 200 Conference room: 100 Conference room: 250 Director's office: 150 Commons, lunch, assemblies: 2,500 Instructional space: 5,000 Computer lab: 800 Kitchen, tiled, can be vinyl: 200 Bathrooms: 1,000 Storage (4 at 100 each): 400 Custodian and storage: 100 Health: 150 Closed in room for TV studio, drama: 1,200 Teachers' work room: 200 Additional storage: 400 Circulation: 900 Total: 14,150 Other build out requirements: security system; open green space north of bldg.; fence around grounds; conduit for phone, data lines **For more information contact Wayne Jennings, Designs for Learning at or 8

9 Tools for Business Planning Specific tools for charter school business planning Friends Network s Guide for Developing a Business Plan for Charter Schools Self-Help s Charter School Cash Flow Template (Excel Spreadsheet) Charter School Business Planning Spreadsheets from Leadership for Quality Education and the Illinois Facilities Fund General business planning guides, tools, and resources Small Business Administration Business plan outline: SBA Small Business Classroom: Current on-line course offerings include The Business Plan and How to Raise Capital for a Small Business Local SBA Offices: Quicken.com Tools for Small Enterprises Business plan samples and templates: Business planning spreadsheets and model documents and policies: Other sites with business planning resources Accountability Planning Next to real estate planning and business planning, accountability planning seems not to belong. But experienced charter school leaders say that having a clear accountability plan for the school is critical to convincing investors to ante up. For prospective lenders and landlords, the charter school renewal process can be frightening. Since facilities loans and leases often require year terms to be feasible, lenders and landlords are smart to ask: what will happen at the end of three or five years when the charter comes up for renewal? A clear accountability plan can turn the black box of renewal into one of the many calculable risks investors take when providing 9

10 long-term financing. For potential donors, the accountability plan is an essential part of the case the school makes for the value of a charitable contribution, since it outlines what the school hopes to achieve and how it expects to get there. See the Tools for Accountability Planning box for some accountability planning resources. Tools for Accountability Planning A vast array of such tools exists, but two places in particular offer well-organized gateways to this world of resources: An Annotated Resource Guide for Shaping an Accountability Plan for Your Charter School produced by the California Charter Schools Development Center and available through the Friends Network s website: Standards and Assessment Resource List compiled by Leadership for Quality Education: Lever 2: Minimizing the Amount You Have to Finance How much will you have to borrow (or incorporate in a long-term lease) to finance your facility? The amount is a function first of the total size of the project how much it will cost to get a facility ready for students. But the amount you have to finance also depends on the portion you can raise through means other than borrowing. The next three sections of Out of the Box discusses a number of strategies charter schools are using to take on both of these challenges. Redefining the School talks about ways charter schools are reducing the total size of their facilities projects by rethinking what they truly need in their facilities. Bringing Your Own Equity discusses sources of grant funds that have helped charter schools bring down the amount they financed. Working a Deal describes ways charter schools have obtained space for less than the market would typically charge. While the specific examples cited may not apply to your school or community, they may serve as catalysts for your thinking about analogous opportunities in your own setting. Redefining the School Most of us went to schools with a standard design classrooms off of hallways; a library; a cafeteria and gymnasium; perhaps an auditorium; parking lots, playgrounds, and sports fields outside. The typical public school is a self-contained campus with all the needed facilities onsite. Charter schools offer the opportunity to rethink this self-contained model, and many charter schools are doing just that. They are contracting with other organizations or using free public facilities for functions like athletics, performing arts, even libraries and science labs, freeing up their scarce facilities dollars for renovating the schools core classroom spaces. They are 10

11 using technology to connect students to resources that ordinarily are found on site. The box entitled Off-campus Resources contains some ideas. Off-campus Resources County parks and recreation facilities Private recreation facilities (from YMCAs to for-profit gyms) Public libraries Museums Local businesses (e.g. for computer facilities, common spaces) Universities Community colleges Other schools Often, charter leaders redefine the school primarily to solve their facilities problems, but they often find that the new arrangements produce other benefits as well expanding educational opportunities for students even as they help out with the bottom line. The experience of City on a Hill Charter School, featured in the What is a School Anyway? box, makes some of these possibilities clear. Charter school leaders emphasize that, the redefined campus creates its own challenges. Can you find appropriate facilities in your community? How will you transport students to far-flung locations? How will you manage the collaborative relationships you must establish with other parties to make these arrangements work? Will contracting for outside facilities really save money, all things considered? Redefining the campus is no silver bullet. But many schools are finding it a helpful device in meeting the facilities challenge. 11

12 What is a School Anyway? City On A Hill Charter School in Boston, MA has its home in a YMCA adjacent to Northeastern University. The school rents space from the YMCA and has expanded this space every year while putting in $2,000,000 for renovations. Not only has the YMCA been a good place to hold classes, City On A Hill also has a programmatic partnership with YMCA. It is able to utilize the YMCA s gymnasium, after-school programs, and other facilities. The proximity to Northeastern University also offers some wonderful benefits to City On A Hill. As adjunct faculty at Northeastern, City On A Hill teachers have access to the university s parking spaces, library, recreational facilities, and other amenities. Seniors are eligible to take classes at Northeastern and teachers can bring students to the library to use the internet, catalogs, reference materials, etc. In addition, if City On A Hill hosts a student teacher from Northeastern, the school receives credit for a free course at the university for a City On A Hill teacher. Although City On A Hill s relationship and arrangement with the YMCA has proven to be mutually beneficial, it does challenge the students with an adjustment from a more traditional school environment, and the YMCA must accept the challenges of having high-school students around all day. A school considering a similar arrangement should make sure that the hosting facility like City On A Hill s YMCA is open to the positive opportunities and challenges that the young people present. **For more information contact Sarah Kass at (617) Bringing Your Own Equity Redefining the school may bring down your need to borrow, but you will probably still face some needs for financing. One obvious way to reduce this further is to raise money you don t have to pay back. Here are some ideas from charter schools around the country: The old-fashioned capital campaign: Perhaps the most common and straightforward approach is simply to solicit donations for your facilities costs from individuals, businesses, and foundations. Though some funders are unwilling to provide money for facilities, they may be able to make an operating grant that frees up other funds for facilities. See the Successful Results box for one school s experience with a capital campaign. For advice on fundraising and information about hundreds of funders, a good source of information is the Foundation Center s website: 12

13 Successful Results Lead to More of the Same New Visions Charter School in Minneapolis, MN raised $4.6 million over a 2 and 1/2 year period. In doing so, New Visions found that a charter school must show and document it is producing results. For example, New Visions works with students who have a history of setbacks in traditional schools. Through the combination of the various components of its unique programs, the school has produced about a 1.5 year reading gain with its students each year for the past 6 years. Without those results, the school feels it would not would not have been as successful in raising the funds. New Visions also found that producing an annual report of results made more individuals, corporations, and foundations aware of its program and therefore more interested in making contributions. **For a more in-depth review of New Visions School s experience, see the Many Paths Lead to New Visions box toward the end of this document. Federal community development funds: Federal funds may be available for the renovation of facilities not for charter schools per se, but for buildings in areas of the community that officials have targeted for physical improvement. Charter schools all over the country have been able to tap these funds to help pay for their facilities. For example, the AppleTree Institute in Washington, DC tapped Community Development Block Grant (CDBG) funds to help pay for its development of an incubator for charter schools in the District (see the box Making the Most of Extra Space under Working a Deal, below.) For more information about the CDBG program and other federal initiatives, see the box Federal Community Development Resources. Local community development funds: In addition to these federal resources, your state or municipal government may have additional funds available for similar efforts. Many of these programs provide loans (these are explored below under Minimizing the Cost of Financing, but some provide grants, such as those obtained by Colorado s Crown Pointe Charter Academy ( Education and Redevelopment box.) Historical renovation funds: In some places, charter schools housed in old buildings, such as old schools, can benefit from historic preservation funds. The box Capitalizing on History provides two examples of charter schools that have done so. (See also the discussion of historic tax credits under Minimizing the Cost of Financing, below.) 13

14 Federal Community Development Resources Community Development Block Grants The Community Development Block Grant Program provides states with annual direct grants, which they in turn award to smaller communities for use in revitalizing neighborhoods, expanding affordable housing and economic opportunities, and/or improving community facilities and services. Program Description: State Contacts: Community Connections: The Information Center for the U.S. Department of Housing and Urban Development Office of Community Planning and Development including information on CDBG technical assistance, providers, and events Successful Application of CDBG Funds: Through the John J. Gunther Blue Ribbon Practices in Community Development awards, HUD recognizes the most notable and innovative practices in community development, including many successful applications of CDBG funds. Empowerment Zones/Enterprise Communities The Empowerment Zone/Enterprise Community (EZ/EC) effort provides tax incentives and performance grants and loans to create jobs and expand business opportunities in the most economically distressed areas of inner cities and rural communities. It also focuses on activities to support people looking for work: job training, child care, and transportation. Background Information and Listing of EZ/ECs: Public Housing HOPE VI The HOPE VI program was developed as a result of the National Commission on Severely Distressed Public Housing, which was charged with proposing a National Action Plan to eradicate severely distressed public housing by the year The Commission recommended revitalization in three general areas: physical improvements, management improvements, and social and community services to address resident needs. Program Description and Contacts: 14

15 Education and Redevelopment Crown Pointe Charter Academy in Westminster, CO is located in a 10,700 square foot facility owned by the school district. Before becoming home to Crown Pointe, the building was last used for vocational training and had become dilapidated. Crown Pointe was able to renovate the building with the help of the City of Westminster. Westminster had identified a portion of the city as an urban redevelopment zone and felt that a charter school in that neighborhood would attract younger families and help the city meet its redevelopment objectives for the area. The city gave $400,000 to Crown Pointe to renovate the building, in turn asking the school to target 33 percent of the enrollment from the South Westminster area (the redevelopment area). Crown Pointe is now in the process of getting approval from the school district to double the building s size. The school needs approximately $1.5 million to complete this expansion, and the city has already given $111,000 toward this amount. The school s leaders plan to mount a corporate and individual fundraising campaign and to submit grant applications. Crown Pointe s goal for this expansion project is to raise $500,000 through fundraising and obtain loans for the remaining amount. For more information contact Kay May at (303) or Capitalizing on History The Edison Project teamed with a neighborhood organization called New Cole Economic Development Corporation for a $6.5 million renovation of Denver's historic Wyatt School. The renovation includes an addition with a gym, a library, a computer lab, and classrooms. Renovating a historic property makes this project somewhat unique and even helped fundraising efforts. Because of the historic background of the building, the Colorado Historical Society gave $400,000 toward the project. In addition, more than a dozen foundations, individuals, and government agencies awarded grants to the school to help with the construction costs. Overall, the school raised nearly $4.5 million dollars, funding the balance of the project with a bank loan. For more information contact Garrett Wyman at (212) or Marble Charter School is another example of a charter school that took advantage of its historic nature. The school is located in a 1910 historic schoolhouse. In acquiring funds for the needed renovations, the charter school obtained two grants from Colorado Historical Society in the amounts of $87,000 and $111,000. Although the building hadn t been used as a school since the since the 1940s, in the 1980s, the school district sold the building to the Marble Historic Society for $1. The historic society used the building mainly as a museum until the some citizens presented the idea of starting a charter school in the community. At that point, the school had to decide if it wanted to purchase or rent the building from the historic society. Because the building would need a fair amount of renovation, the school opted to rent the building for 50 years for $1 a year as to avoid having to renovate the entire building; renting space required bringing only the portion of the building being used for school purposes up to school standards. The school also borrowed $117,000 from the school district at 0% over 10 years and has received other foundation based funding and donations. For more information contact Katie Updike at or visit 15

16 Working a Deal Another way charter schools have reduced costs is to find a property owner willing to sell or lease a building or conduct renovations for something below what the market will bear. Without question, these deals are hard to come by. You have probably already scoped out the most immediate options churches with idle education space during the week, child care centers and private schools that aren t at capacity or have closed. But here are a few rocks to consider turning over: Vacant public space. The most obvious kind of public space is the vacant public school building, and many charter schools have found homes in current or former schools. In other places, though, local school buildings are not an option because there is simply no space, or because the relationship between the charter school and the district is less than chummy. But school buildings are not the only vacant space to consider. Federal law, and some state laws, require public agencies of all kinds to make idle facilities available to nonprofit organizations for a reduced cost. The Shopping for Surplus Property box contains information about how you can learn of vacant federal property available at a discount; your state may have similar resources as well. Shopping for Surplus Property The U.S. General Service Administration s Public Buildings Service sells most federal surplus Government real estate. For information, you may call or request a free copy of the U. S. Real Property Sales List by writing the Consumer Information Center, Pueblo, CO or calling (719) Information on real property sales can be obtained through Internet at Also, information on commercial real estate that HUD sells can be obtained through Internet at Some states also have similar laws on the books governing state and local property. New York s recent charter law requires the state and school districts to make lists of surplus property available to charter schools. (New York Charter Law, Page 8, Section 2853(3)(c), available at Employers. More and more charter schools are persuading employers to help them build or renovate a facility on or near the employers property. Though most state charter laws do not allow a charter school to set aside student seats for children of a particular company s employees, many businesses still find it advantageous to have a nearby public school associated with the company. In return, they may be willing to provide a building, provide funds for a building, or guarantee a loan taken out by the school. And they can provide linkages to business activities that can be educational. In Florida, for example, schools-in-the-workplace are burgeoning in regular districts as well as charter schools, which are allowed to set aside student slots for employees children. So-called satellite schools exist in a zoo, a vacation resort, a large hotel, an Air Force base, Disney World, and Universal Studios. 16

17 Museums. Charter schools housed in museums are increasingly common across the country. In addition to solving the facilities problem, these partnerships of course create extraordinary educational opportunities for the students. See the box Museums of Learning for examples. Museums of Learning The Flagstaff Arts and Leadership Academy (FALA) in Arizona is located on the grounds of the Museum of Northern Arizona (MNA) (http://www.musnaz.org/). MNA collects and displays objects relating to Native American art and history, natural science, and contemporary art. Where appropriate, its art and science exhibitions are integrated into FALA s curriculum. School lessons are centered within six 28-by-60 foot modular classrooms, but the museum shares its entire 400-acre campus with FALA s students and faculty. FALA s charter was granted in January of 1996, but did not yet have a site for the school. Its founder, Karen Butterfield, looked at a 10,000 square foot facility in a shopping center, which she determined was not an ideal environment for a high school. She also considered finding investors to purchase property and then leasing modular classrooms. But, finding a workable site proved difficult, and postponing the charter school for a year seemed imminent. A day after the charter was officially approved, Butterfield proposed her idea of having MNA host the school and sharing the school s modular buildings for summer outreach programs. Soon thereafter, the proposal was approved and FALA had a home. Butterfield believes that this innovative partnership helped the school raise much needed start-up funds, including double the average stimulus money for Arizona charter schools. Source: Museums and the Charter School Movement, Museum News, September/October 1998 The Henry Ford Academy of Manufacturing Arts & Sciences (http://www.hfacademy.org/) in Dearborne, Michigan is located on the premises of Henry Ford Museum and Greenfield Village. However, unlike FALA (featured above), the Henry Ford Academy was actually born out of the museum itself. Even before Michigan s enacted its charter school law in 1993, the Henry Ford Museum s leadership started focusing increased attention and resources on an expanded educational mission. During the school s planning phase, it was decided that a school would be developed on the grounds of the museum using start-up money committed by the Ford Motor Company Fund. The architect s design process emphasized participant involvement, linking the built environment with the curriculum and incorporating existing resources as much as possible. Building on the museum s existing facilities a cafeteria, rest rooms, auditorium, and pool allowed planners to envision a 400-student high school for a fraction of the typical cost. The rest of the school is located in Greenfield Village, where farms, fields, and historic structures of the village will be the focal point for formal education. Non-historic structures such as an old restaurant and arcade are being converted into learning studios, project rooms, staff offices, and a cafeteria. Eventually, some historic structures will be converted for use by the academy students as well as museum visitors and summer camp participants. Source: Museums and the Charter School Movement, Museum News, September/October 1998 Community colleges and universities. Colleges and universities in your area may well have perfect space for classrooms, common activities, media centers, recreational facilities, and other needs and this space may be sufficiently idle that you can make a deal. Housing your school within such an institution may also offer programmatic advantages, as the profile in the Making the Community College Connection in Arizona box illustrates. 17

18 Making the Community College Connection in Arizona The Arizona Agribusiness and Equine Center is a 300-student charter school in Arizona that is housed in two Phoenix-area community colleges South Mountain and Paradise Valley. With a focus on agribusiness, Arizona s second largest industry, the school s high school students have access to courses in biotechnology, animal science, natural resources, and a core college prep sequence that integrates the agribusiness emphasis. The links to the community colleges provide more than access to excellent facilities, with the full range of science labs and technology needed for the school s unique focus. The community colleges also offer college-credit courses for the school s students; classes of interest to parents; and a faculty pool that can teach classes at the charter school on a course-by-course basis, simplifying the school s hiring needs. **For more information contact Linda Proctor Downing at (602) Lever 3: Minimizing the Cost of Financing Pursuing strategies like those outlined in the previous section have helped schools afford suitable facilities, but most schools still end up financing some portion of their facilities costs through loans or long-term leases that incorporate the costs of renovations or construction. How have schools held down these costs? First, it s helpful to understand why charter schools often end up paying high rates for their loans and leases. Having a handle on these factors can point you toward strategies for minimizing their consequences. See the box, Why Charter Schools Pay More, for a list of the key factors. While the strategies in this section can help abate those factors, they cannot make them go away. Without drastic changes in public policy, charter schools are unlikely to end up with the same financing opportunities conventional school districts enjoy. As a result, it s important for charter school leaders to avoid the expectations gap hoping you can obtain financing on terms available to school districts when in fact you ll face a much different situation. With those factors in mind, take a look at four sets of strategies charter schools across the country have used to keep costs down: being a smart consumer, seeking out low rates, abating risk, and looking for revenue-generating opportunities. Being a Smart Consumer The element you control most fully is how smart a consumer you are in the financing process. Here are some helpful tips: Shop! The first advice that many experienced charter schools offer: be sure to shop around, considering multiple possible sources of financing. The first or most obvious deal you encounter may not be the best. See the box Some Sources of Financing for some categories the main 18

19 options fall into, and the Appendix for more information about specific sources. When shopping, schools naturally focus on the bottom line the rate they ll be charged on a loan or lease. It s important, though, to look more broadly at deals, also considering such factors as: Fees and other expenses: Interest or lease rates are often not the only costs of financing consider any up-front or ongoing expenses that go along with particular deals. Payment schedule: Does the proposed repayment schedule work in light of your expectations about cash flow? Consider the schedule on which you expect to receive your per-pupil funding or other critical resources. Prepayment terms: What penalties do you face, if any, for paying off the loan or terminating the lease before the agreed-upon time? If you think you may want out early (because you ll want to move to a larger / more suitable space or you expect to obtain more favorable financing after a few years track record) make sure you understand what you ll be required to do to escape. Give yourself time. To the extent possible, give yourself time to find, finance, and renovate or construct your facility. You may not have much choice, but if you do, stretching out the timeline can make a big difference. A longer timeframe gives you the space to shop around. It prevents you from having to accept a bad deal because it s the only deal. It minimizes the impact problems that inevitably arise in the process of construction and renovation. It leaves you more time to meet the myriad zoning and code requirements you will face. And it avoids the need to pay contractors and others a premium for fast work. However, keep the timeline short between when your payments start and when revenues flow from student attendance. Be willing to cobble. Though many charter school operators hope for a silver bullet that will meet all their financing needs, much more common is a process of cobbling together multiple sources of financing. Such arrangements are complicated, of course, but often they offer the best overall deal. In reviewing the list in the Some Sources box, think about ways to combine your potential resources into a favorable package. 19

20 Why Charter Schools Pay More Many factors go into the rate charged for financing by the market. On many of these factors, charter schools face built-in disadvantages: Cash flow: First and foremost, investors are interested in knowing whether a borrower will generate sufficient cash flow to carry out its business and make loan or lease payments on time. In most charter states, though, charter schools do not receive full per-pupil funding; in particular, they do not typically receive per-pupil facilities funds. As a result, cash flow is often tight. Furthermore, if the school is a start-up, investors have no track record with which to test the reality of your projections. Even though you have a charter, it s only as good as the number of students you actually enroll. Access to tax-exempt financing: When school districts finance facilities, they generally do so by issuing bonds that are tax-exempt. Since investors do not have to pay income taxes on the interest they earn, they are willing to charge a lower interest rate on these bonds. Charter schools often have difficulty tapping tax-exempt financing. The legal picture in their states may be unclear regarding whether charter schools are eligible for such financing, the costs associated with pursuing this option may be prohibitive, and the risks associated with charter schools may appear too great for the typical tax-exempt investors. Uncertain futures: School districts also obtain favorable rates because they are virtually guaranteed of being in existence next year (and the next and the next). Charter schools, by contrast, can be shut down if they fail to deliver results. Investors will tend to charge higher rates because of the uncertainty inherent in charter schools existence, especially when renewal and revocation policies are shrouded in mystery or subject to political winds. Value of collateral: Though investors hope to be repaid over time by a charter school s payments, they have to plan for the worst. If the school closes, they need some assurance that collateral will cover the school s obligations. In many cases, though, charter schools collateral is weak. Schools that are leasing have little to offer in the way of collateral. And even schools that own face problems schools require very specialized facilities that may be of little value to other inhabitants. The deal s loan to value the ratio of the loan amount to the value of the collateral may be too high for comfort. These considerations tend to raise the cost of financing for charter schools. Lack of guarantors: One reason investors regard nonprofit corporations as high-risk is that no individual is on the line financially for the enterprise s performance. Many charter schools recruit one or more guarantors individuals or corporations that agree to back your financing by co-signing your loan or pledging specific assets as collateral. Other charter schools, though, lack access to such deep pocket backers. Tight schedules: Charter schools often face a tight timetable receiving a charter in the spring, for example, they may seek to open the following fall. Tight timetables make it difficult to hold down costs. Your time for shopping and negotiating is limited, and you may be charged a premium for hurried transactions. Sophistication of borrowers: Many charter leaders lack experience in the byzantine worlds of finance and real estate development. This lack of background can raise costs for two reasons. First, inexperienced borrowers may find it hard to find and negotiate the best possible deals. Second, in setting rates, investors are likely to consider the business sophistication of the borrowers, charging a premium when experience in finance and business management is weak. Understanding by investors: Since charter schools are new and relatively rare, many investors do not understand them. Some may not be willing to take the time to educate themselves about key issues like charter school finance and the renewal process. They may in turn overestimate the risks associated with financing a charter school. 20

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